SEC Pays First Whistleblower Bounty Award

“The first whistleblower award is emblematic of a broader effort under Chairman Schapiro and Enforcement Director Robert S. Khuzami to enhance enforcement efforts by altering the dynamic of the investigative process in ways that provide the enforcement staff with additional avenues of information. Individuals in possession of sensitive, confidential business documents and information belonging to issuers and regulated entities now have concrete evidence that sharing such material with the SEC can lead to a significant payoff.” (Skadden Arps)

On August 21, 2012, the Securities and Exchange Commission announced that it has awarded its first ever bounty to an individual who provided evidence that led to a conviction for securities law violations.

The SEC’s bounty program was established by the Dodd-Frank Act to reward whistleblowers between 10% and 30% of money collected in SEC enforcement actions that involve more than $1 million in sanctions.

Details of the “multi-million dollar fraud” revealed by the whistleblower are not available (as required by law). But the payout nevertheless offers three takeaways for publicly traded companies:

1. This award is only the tip of the iceberg:

“The award announced today represents the first payout under the whistleblower program, but additional payouts should be expected as the chief of the SEC’s Whistleblower Office, Sean McKessy, said the SEC receives about eights tips per day under the program.” (Wilson Sonsini Goodrich & Rosati)

2. Internal reporting policies are more important than ever:

“Given the real incentives available to Dodd-Frank whistleblowers and their attorneys who report to the SEC, companies need to review their internal compliance and reporting policies and potentially revise these policies to stress the importance of internal reporting, and also to encourage employees to come forward and report suspected fraud without fear of retaliation.” (Orrick)

3. Not every whistleblower is eligible for an award:

“… it is interesting to note that the SEC denied [a] second whistleblower’s claim for a portion of the monetary sanctions in this case. In support of that decision, the SEC notes that the information supplied by this second claimant ‘did not lead to or significantly contribute to the SEC’s enforcement action, as required for an award.’” (Warner Norcross & Judd)

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